Quality Digest Magazine

Pgina 1 de 6

November 30,

Pushing the Boundaries

in Nano and Microscale
Metrology
Making the Most of ISO
9001
How Enterprise Software
Facilitates FDA
Compliance
The Future Master Black
Belt
Evaluating the Success
of TL 9000 and QuEST
Forum

The Hidden Costs of

Poor Quality
2007 SPC Software
Directory

by Gerald Lee

http://www.qualitydigest.com/currentmag/articles/06_article.shtml

30/11/2007

Quality Digest Magazine

Pgina 2 de 6

very good quality practitioner knows the effect that poor quality has on top and bottom
lines, and consequently that improving poor quality is a moneymaker. Although this is
universally acknowledged, its not always clear how to go about improving poor quality. Poor
quality is opportunity lost and the loss of precious resources, such as time and money, on
unnecessary tasks and wasted materials. In this article Ill discuss some of the obvious and
less obvious opportunities lost due to poor quality. Ill also discuss in greater detail an
obscure and misunderstood cost that offers the turnaround opportunity of significant
savings: the safety margin.

The cost of poor quality

At ABB we use a metric known as cost of poor quality (COPQ). COPQ is measured by
estimating the cost of all efforts undertaken in an organization, including materials and
processes used in assembling our products, that dont provide value to customers. In the
lexicon of lean manufacturing, these are nonvalue-added activities. At ABB, COPQ is the sum
of all nonvalue-added costs divided by the total revenue thats generated. The resulting
measurement is the percentage of revenue thats lost due to waste.
COPQ is measured, reported, and tracked in each of the business units. COPQ is used to
measure progress within the organization and to identify best practices that can be shared
throughout the company. COPQ is a metric and a learning tool, helping an organization to
understand whats nonvalue-added and to establish opportunities for improvement.
Measuring COPQ establishes a baseline, and eventually a trend line (heading, hopefully,
toward the goal), as seen in figure 1, below.

The value of COPQ Inspection, waste, rework, and warranty costs are the most obvious
nonvalue-added activities that go into the COPQ metric. Its estimated that up to 10 percent
of revenue is wasted on these activities, which are fairly easy to measure and are
understood by most people, even those not practicing in the quality field. In a typical
organization, a great deal of effort is spent in improving these metrics. Its easy to gain
support and encouragement to eliminate these wastes.
However, as seen in figure 2, below, inspection, waste, rework, and warranty costs are only
the tip of an iceberg composed of many unknown and misunderstood nonvalue-adding
activities. The nonvalue-adding costs from waste, inspection, warranty, and rework are

http://www.qualitydigest.com/currentmag/articles/06_article.shtml

30/11/2007

Quality Digest Magazine

Pgina 3 de 6

dwarfed by the root causes lurking unseen beneath the waterline.

Most alert organizations realize that losses can accrue from wastes such as excess
inventories, unnecessary motion, and supplier nonconformance. The enlightened company
will also see that losses can occur from more obscure wastes, such as unnecessary
paperwork, large lot sizes, and excessive auditing. These wastes lead to additional estimated
COPQ losses of up to 15 percent of revenue.
In a typical facility, theres normally much less effort spent on improving (and profiting
from) these more esoteric nonvalue-added activities. Thats because, in part, theyre difficult
to characterize or can only be quantified with soft numbers. So its difficult to gain support
for their elimination. But make no mistake: These are real opportunities and often the root
causes of wastes.

The hidden cost of safety

margins
Another waste is easy to
understand and quantify,
but even in the most
enlightened organizations
receives little attention
because theres no
obvious indication that
anything is wrong. In
most instances quality
appears to be excellent,
and no action seems to
be required. To make
matters worse, this

http://www.qualitydigest.com/currentmag/articles/06_article.shtml

30/11/2007

Quality Digest Magazine

Pgina 4 de 6

hidden problem can

continue to grow while quality appears to improve. This insidious waste is the safety margin.
Consider the Six Sigma distribution shown in figure 3, at right. This simple and eloquent
chart shows the interaction between product specifications and process capability--the
beauty of a Six Sigma design.
A two-sided Six Sigma design can be difficult and expensive both to achieve and sustain.
Most designs are single-sided. A specification will call for a hole smaller than, a weight larger
than, or a temperature lower than a nominal value. Although a single-sided design
specification at first glance might appear helpful, it can mask serious flaws.
Consider the situation shown in figure 4, at right. Here the specification calls for the process
to be capable of delivering a measure less than a nominal value, but the process capability is
poor and widely distributed, so failures sometimes occur. In this situation its easy for the
engineer to add a safety margin to prevent failures. If this fixes the problem and failures
no longer occur, it appears that waste is no longer being generated.
In fact, waste can actually be increasing and going unnoticed because its hidden to most
observers in most industries.
An example of this phenomenon and its consequences can be seen in the food-processing
industry. There, a product must meet the weight specification printed on the packaging or
there will be serious consequences from both governmental regulators and consumer
groups. A margin of safety can be added to each package to make certain that this never
happens, but an extra ounce or gram added to each package represents waste and,
subsequently, profit loss. Its essential in this highly competitive industry that processes be
capable, or product costs will soar.
In most other industries the safety margin appears innocuous and is considered a lifesaver
to the designer. Its easier to add a little to the design so that the requirement is always met
than it is to ensure that the process is exact. Whats a little additional material when it
decreases failures and improves product quality? In many cases this seems like a prudent
alternative, but this is a dangerous protocol.
The most obvious reason is the cost of the extra material. Not as obvious are the indirect
costs for handling, shipping, and finishing the material. These can be quite high and wont
be directly attributable to the safety margin. Adding a margin of safety also means that the
process can be sloppy or out of control. The process might be used on multiple products, or
it could set precedence for all processes. Finally, a process thats out of control will tend
over time to become even more out of control. So even if a safety margin is used, the
process eventually will produce product thats out of specification. What happens next? An
operation that doesnt control its processes usually will add more safety margin, and the
cycle repeats.
Figure 5, at right,
shows an optimal
situation where
processes are
capable, well
understood, and in
control. In this
instance safety
margins arent
necessary, and
failures dont occur.
In an organization

http://www.qualitydigest.com/currentmag/articles/06_article.shtml

30/11/2007

Quality Digest Magazine

Pgina 5 de 6

where this
methodology is followed, costs can be contained, designs can be optimized, and a
competitive advantage can be maintained.

Opportunity lost
How often does this occur? It varies depending on the industry and the age of the product.
No capable engineer will ever design large safety margins into a new product or process.
Nonetheless, it makes sense to verify this. One method to confirm that minimal safety
margins are used in a design is to add this verification to the design reviews or the phasesand-gates checklist.
Even if safety margins are minimized during design, this is an insidious problem that will
crop up repeatedly. This is especially true of any products that require customization.
Customization leads to multiple engineering opportunities, and, lets face it, engineers are
paid to engineer. A good engineer will try to improve a product, given the opportunity, but
he or she doesnt always understand the justification for the original design. Insistence on
using product standards can help prevent this.
A more typical scenario is when problems occur in the process and its considered easier to
overbuild the product instead of correcting the process. Materials are made a little thicker,
or a better grade is used; external features, such as cooling fans, are added; or extra
process steps are taken so that the product can pass the final test. This is considered a
prudent and cost-effective solution, when in fact its like placing a band-aid on a festering
sore. Adhering to sound design practices and process monitoring can help minimize this
problem.
How do you identify the problem? One of the easiest ways is to compare your products to
your competitors, to a similar product from another facility, or to a product from a worldclass manufacturer that has many of the same characteristics.
From the product perspective, compare the weight, size, number of components, fit and
finish, and cost. If your product is heavier, larger, or more complex than your comparison
model, this is an opportunity to simplify.
From the process perspective, compare labor hours, throughput time, the number of process
steps, the complexity of the process, and the product yields. Look into the time it takes to
deliver your product, the amount of packaging required, or if special handling is needed.
Look for anything out of the ordinary. If your order-to-delivery time is longer than your
competitors, theres probably an opportunity being lost.
How much can be saved? Consider how much bigger, heavier, or more complex your
product is due to the safety margins. Consider how much more expensive a heavier and
larger product is to ship, how much more handling is required, and if any other special
processing is necessary. Ive seen instances where a product was 40-percent heavier than a
similar product.
As a general rule, one should use the Taguchi loss function to answer this question. Youll
see an exponential increase in costs the further you are from specification. At first glance,
this seems overly harsh, but consider all the possible added costs (e.g., 40 percent more
materials, 40 percent more handling, 40 percent more shipping and preparation, and 40
percent more processing). If the product falls outside the specification limit, the loss should
theoretically be 100 percent. This is indeed a very slippery slope, where at first glance it
would appear as if no problem exists whatsoever.
Although its difficult to say how much can be saved on any individual effort, all these factors
should be considered when determining how much of an opportunity exists.

http://www.qualitydigest.com/currentmag/articles/06_article.shtml

30/11/2007

Quality Digest Magazine

Pgina 6 de 6

Conclusion
Poor quality is opportunity lost. Understanding where and why these opportunities exist is a
chance to improve the bottom line. Although theres good value to be gained by improving
scrap, rework, and warranty costs, theres even greater value in looking for the root causes
of these, because the return is normally much greater.
Waste due to safety margins can be easily prevented if good design practices are followed
and product standards are used. Waste due to safety margins can also be easily discovered
with a little knowledge and effort. Once discovered, this can be the source of huge
opportunity and a clear competitive advantage.

About the author

Gerald Lee is the director of internal audit, manufacturing operations review with ABB in
Raleigh, North Carolina. He works with ABB facilities worldwide to improve operational
excellence. Prior to ABB, Lee worked at Eastman Kodak in Rochester, New York.

We value your feedback.

To comment on this article,
note the article title
and then click here.
Navigation

Home | Search | Subscribe | Advertise | Resources | ISO 9000 Database | Web Links | Back Issues | Contact Us

Current Issue

Home | Articles | Columnists | Departments | News | Software

Copyright 2006 QCI International. All rights reserved.
Quality Digest can be reached by phone at (530) 893-4095.
Contact us via Contact Form

http://www.qualitydigest.com/currentmag/articles/06_article.shtml

30/11/2007